In: Finance
Portfolio A consists of a 2-year zero-coupon bond with a face value of $8,000 and a 10-year zero-coupon bond with a face value of $2,000. The current yield on all bonds is 11.75% per annum. (Answer with two decimal digits accuracy)
The duration of portfolio A is
Solution: | |||||||
Bond | Maturity | Yeild |
Mac. Duration |
Present Value Factor (n years ,Yeild) |
Par value | Market Value | Weights |
2 year bond | 2 | 11.75% | 2.00 | 0.801 | $ 8,000 | $ 6,408 | 0.91 |
10 year bond | 10 | 11.75% | 10.00 | 0.329 | $ 2,000 | $ 658 | 0.09 |
$ 7,066 | |||||||
Duration of portfolio | = W1D1+W2D2+…......WnDn | ||||||
Where | |||||||
W = Weight of bond | |||||||
D = Duration of bond | |||||||
n = number of bonds in port folio | |||||||
= 0.91*2+0.09*10 | |||||||
= 2.72 years |